Timken Company (The)

Good morning and welcome to Timken's third quarter earnings release conference call. My name is Lydia and I'll be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you'd like to withdraw your question, press star, then the number two. Thank you. Mr. Fineapple, you may begin your conference.

Thanks Lydia, and welcome everyone to our third quarter 2023 earnings conference call. This is Neil Frohnapple, Director of Investor Relations for the Timken Company. We appreciate you joining us today. Before we begin our remarks this morning, I want to point out that we have posted presentation materials on the company's website that we will reference as part of today's review of the quarterly results. You can also access this material through the download feature on the earnings call webcast link With me today are the Timken Company's President and CEO, Rich Kyle, and Phil Fricasa, our Chief Financial Officer. We will have opening comments this morning from both Rich and Phil before we open up the call for your questions. During the Q&A, I would ask that you please limit your questions to one question and one follow-up at a time to allow everyone a chance to participate. During today's call, you may hear forward-looking statements related to our future financial results, plans, and business operations. Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in today's press release and in our reports filed with the SEC, which are available on the Timken.com website. We have included reconciliations between non-GAAP financial information and its gap equivalent in the press release and presentation materials. Today's call is copyrighted by the Timken Company, and without express written consent, we prohibit any use, recording, or transmission of any portion of the call. With that, I would like to thank you for your interest in the Timken Company, and I will now turn the call over to Rich.

Thanks, Neil. Good morning, and thank you for joining our call. Timken delivered a solid third quarter and we remain on track to deliver another record year of revenue and earnings per share while expanding full year margins. Revenue was a record for the third quarter and was up around 1% from prior year. EBITDA margins were up 10 basis points and adjusted earnings per share were down 5%. As expected, demand softened sequentially as customers continued to reduce inventory levels and respond to an uncertain economic environment. China and wind energy slowed more than anticipated and were the leading contributors to the organic revenue decline. We managed our cost structure very well, delivering 18.9% EBITDA margins, a 10 basis point improvement over the prior year. Inflation is moderated but remains persistent. Despite the inflation, price cost was positive in the quarter as it has been all year. Free cash flow of $151 million was strong and up significantly from prior year. We continue to execute our strategic initiatives, which are focused on operational excellence, outgrowth, and capital allocation. This includes advancing our global manufacturing footprint in both engineered bearings and industrial motion. We are on track to complete the consolidation of two facilities into existing operations by the end of the year. We are also expanding our Mexico operations to begin the production of Timken belts early next year. Our operational performance has recovered from COVID and supply chain challenges, and we have excellent focus on driving improvement initiatives across our global operations. We continue to invest in and advance our outgrowth initiatives. This includes launching new digital customer solutions and investing in our leadership and application engineering. Our application pipeline, which is the best measure of our future business opportunities, continues to expand across the portfolio. Our balance sheet remains strong, and we continue to be very active in allocating capital growth and margin expansion opportunities. We continue to invest CapEx into advancing our footprint, automating our operations, increasing efficiencies, increasing capacity, and expanding our product lines. We completed the acquisitions of Rosa Sistemi and Desk Case in the quarter. Rosa Sistemi is our fourth acquisition in linear motion and brings complementary products and market positions to our roll-on business. Desk Case expands our filtration offering within our automatic lubrication platform. We also announced the pending acquisition of IMEC. IMEC adds a niche product line to our engineered bearings portfolio specifically designed to serve the needs of energy markets. Strategically and financially, all three acquisitions fit very well within our Timken portfolio and bring strong cross-selling and cost synergies. These acquisitions bring well-known brands with engineered products that enhance equipment reliability and life. Last week, we announced the divestiture of a small bearing product line that is sold regionally in China. The combination of these four transactions will strengthen our product portfolio while adding about $50 million in revenue and will be immediately accretive to margins. We also purchased about 1% of the outstanding shares in the quarter, bringing our year-to-date repurchase total to just under 4% of the outstanding shares. Our balance sheet remains strong. We expect excellent free cash flow in the fourth quarter and into 2024, and we expect to continue to add value through our disciplined capital allocation. Also in the quarter, we published our annual corporate social responsibility report, which details our commitment to environmental sustainability in the products we make, across our global operations, and through advancing industries such as renewable energy. We are also focused on the development and well-being of our employees, investing in community partnerships, and promoting STEM education to help advance the next generation of engineering talent. Turning to the outlook, we are planning for further sequential slowing in the fourth quarter due to seasonality and from customers continuing to reduce inventory from supply chains stabilizing. and we are expecting renewable demand in China to remain a headwind for the quarter. We are planning for inflation to remain at similar levels and for price costs to stay positive. We will continue to bring both our costs and inventory in line with reduced volume levels. We expect to generate both solid margins and strong cash flow in the fourth quarter despite the weaker revenue environment. The midpoint of our guide reflects modest year-on-year improvement in margins despite lower volumes. For the full year, we remain on track to deliver another year of record revenue and earnings per share, with revenue up 5% and earnings per share up 7%. While we're not ready to guide to the full year of 2024, we are planning for a sequential step-up in demand from the fourth quarter to the first, reflecting our normal seasonality as well as stabilizing channel inventory levels. We do not expect a rebound in the first quarter for China, primarily due to wind energy. Across our portfolio, customers remain generally positive on their 24 outlook, but also acknowledge that economic uncertainty remains elevated globally. And finally, I would like to reference slide 12 in the investor deck. Timken's strategy is focused on growing the earnings power and cash generation of the company at attractive and consistent EBITDA margins and returns on invested capital. We remain on track in 23 to deliver another record year of both revenue and earnings, at EBITDA margins approaching 20%. Through both organic growth and consistent M&A, we have steadily grown the business with EBITDA margins that have varied just 210 basis points over the last five years. As we look ahead, we're confident in the long-term growth in demand for Timken products and technology, and we are well-positioned to continue to grow and perform at a high level through a wide variety of market conditions. I will now turn it over to Phil to add more detail on the results and the outlook.